Primary Credit Analyst: Jeff Pusey, San Francisco (1) ;

Transcription

1 Primary Credit Analyst: Jeff Pusey, San Francisco (1) ; Secondary Contact: John Iten, Hightstown (1) ; Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Accounting Considerations Related Criteria And Research FEBRUARY 1, 217 1

2 SACP* Assessments SACP* Support Ratings Anchor a+ + Modifiers = a+ + = Financial Strength Rating Business Risk Very Strong ERM and Management Liquidity Group Support Financial Risk Strong Holistic Analysis Sovereign Risk Gov't Support *Stand-alone credit profile. See Ratings Detail for a complete list of rated entities and ratings covered by this report. Rationale Business Risk Profile: Very Strong Industry leader in engineering-based underwriting and research Highly valued customized loss-prevention services complementing commercial property products Strong operating results due to underwriting granularity and loss prevention consulting Significant global presence within the large commercial property segment Financial Risk Profile: Strong Extremely strong capital adequacy supported by strong, though volatile, operating results Large property book exposed to man-made and natural disasters Greater equity exposure than peers Other Factors Adequate enterprise risk management (ERM) with sufficient processes in place to control risks Consistent strategy to provide commercial property insurance capacity coupled with best-in-class loss prevention services Flexibility arising from mutual ownership structure allowing for a long-term strategic view of risk Business and financial risk profile scores leading to an anchor rating of 'aa-/a+'; we assigned the latter because our view of the company's business profile is on the lower end of very strong due to its narrow focus on commercial property FEBRUARY 1, 217 2

3 Outlook: Stable The stable outlook on FM Global reflects S&P Global Ratings' view that the company has a very strong competitive position supported by its highly regarded reputation for assessing risk to prevent and mitigate loss, as well as its notable market presence in the large commercial property segments. FM Global's extremely strong capital adequacy and strong operating results also allow the group to absorb catastrophe losses and financial market volatility--a key ratings factor. Downside scenario We may lower our ratings in the next two years if FM Global's capital adequacy or redundancy as measured by our proprietary capital model falls below the 'AAA' confidence level for a prolonged period, or if its competitive position weakens. Upside scenario It is unlikely that we will raise the ratings on FM Global in the next two years because of its exposure to capital and earnings volatility arising from its high equity concentration and narrow focus on commercial property business. Base-Case Scenario Macroeconomic Assumptions Real U.S. GDP growth of about 2.4% in 217 and 2.3% in 218 Average 1-year Treasury note yield of 2.4% in 217 and 2.8% in 218 U.S. core Consumer Price Index (CPI) of 2.2% in 217 and 1.9% in 218 Neutral industry outlook for property/casualty (P/C) insurers Company-Specific Assumptions Flat-to-low premium growth due to selective underwriting and competitive environment Long-term combined ratio of less than 9% (assuming 2%-25% points in catastrophe losses) Extremely strong capital adequacy in 216 and 217 Potential realized gains/loss and reserve development excluded FEBRUARY 1, 217 3

4 Key Metrics (Mil. $) 217* 216* P/C: Gross premiums written 5,528 5,473 5,473 5,677 5,658 P/C: Net combined ratio (%) <9 < Net investment yield (%) S&P Global Ratings capital adequacy/redundancy AAA AAA AAA AAA AAA *Forecast data reflect S&P Global Ratings' base-case assumptions. P/C--Property/casualty. Company Description Founded in 1835, Johnston, R.I.-based FM Global provides commercial property insurance and risk management solutions via engineering-driven underwriting and property loss-prevention research. It employs nearly 2, engineers and has a world-class 1,6-acre campus for scientific research and product testing. FM Global comprises four insurance operating entities: Factory Mutual Insurance Co. (FMIC), Affiliated FM Insurance Co. (AFM), F.M. Insurance Co. Ltd. (FMI), and Appalachian Insurance Co. Business Risk Profile: Very Strong FM Global's business risk profile reflects its strong operating results and significant market position in the large commercial property segment, partially offset by a relatively narrow focus. Insurance industry and country risk: Intermediate Overall, FM Global's insurance industry and country risk is intermediate, reflecting low country risk and moderate industry risk for its globally diverse insurance operations--mostly in developed markets that typically have low risks as a result of a stable political environment, financial system, payment culture, and rule of law. We believe FM Global's P/C operations are exposed to intermediate industry risks because of the sector's inherent product risk and consequent susceptibility to reserve volatility. But the stability of the U.S. and Western European insurance markets' profitability, growth prospects, and overall institutional framework mitigates this weakness. Competitive position: Very strong FM Global's competitive position is very strong based on its positive reputation, significant market presence, and overall positive operating results. It is highly regarded for using its engineering expertise in assessing client risks to help prevent and mitigate losses, fostering a significant commercial advantage over competitors. The company utilizes a state-of-the-art research campus to replicate potential property hazards and develop risk mitigation strategies. According to some industry surveys, FM Global is the world's leading provider of large commercial property coverage. FM Global reported relatively strong five-year ( ) operating results based on an average combined ratio of 9.2%, which its moderate use of reinsurance partly supported. But its relatively narrow focus on commercial property products partially offsets our view of the company's competitive position. FEBRUARY 1, 217 4

5 Table 1 FM Global -- Competitive Position (Mil. $) Gross premiums written 5,473 5,677 5,658 5,46 5,164 Change in gross premiums written (%) (3.6) Net premiums earned 3,579 3,617 3,545 3,621 3,234 P/C: Reinsurance utilization - premiums written (%) P/C--Property/casualty. Financial Risk Profile: Strong FM Global's financial risk profile is supported by extremely strong capital, but the company is highly exposed to market risks and catastrophic losses. Capital and earnings: Extremely strong We view FM Global's capital adequacy as extremely strong and a ratings strength. In our base-case forecast, we expect its capital adequacy to remain extremely strong despite the highly competitive pricing environment in the commercial property market because its competitive advantage supports high retention of current policyholders and moderate growth of new business. FM Global's strong earnings support its capital redundancy at the 'AAA' level. The company generated a five-year average return on revenue (ROR) of 17.3% and a loss ratio of 63.1% from For the first nine months of 216, FMIC's statutory combined ratio totaled 87.2%, while its ROR was 23.2%. Although the company has generated strong long-term earnings, it is susceptible to earnings volatility, as reflected by its 12% combined ratio in 211, which stemmed from underwriting losses mostly from tornadoes in the U.S., floods in Thailand, and earthquakes in New Zealand and Japan. Assuming 2%-25% of catastrophe losses, we expect the company to generate a long-term combined ratio of less than 9%, which will offset continued low investment yields and support extremely strong capital adequacy. Table 2 FM Global -- Capitalization (Mil. $) Common shareholders' equity 11,37 1,637 9,716 7,97 6,883 Change in common shareholders' equity (%) (5.5) Total reported capital 11,37 1,637 9,716 7,97 6,883 Change in total capital (reported) (%) (5.5) FEBRUARY 1, 217 5

6 Table 3 FM Global -- Earnings (Mil. $) Total revenue 3,899 3,944 3,857 3,914 3,512 EBIT adjusted 838 1,68 1,1 87 (397) EBITDA adjusted 9 1,123 1, (312) Net income (attributable to all shareholders) , (42) Return on revenue (%) (11.3) Return on shareholders' equity (reported) (%) (.6) P/C: Net expense ratio (%) P/C: Net loss ratio (%) P/C: Net combined ratio (%) P/C--Property/casualty. Risk position: High risk FM Global's risk position is high because of its exposure to man-made and natural disasters, its material equity portfolio, and legacy asbestos and environmental exposure. It has relatively high exposure to catastrophic events due to its commercial property business concentration. As of year-end 215, its investment portfolio comprised about 51.1% equity investments, exposing the company to additional capital and earnings volatility. But the investment portfolio is adequately diversified by sector and obligor, partially offsetting this risk. Table 4 FM Global -- Risk Position (Mil. $) Total invested assets 15,456 15,23 13,836 12,261 11,42 Net investment income Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Portfolio composition (% of general account invested assets) Cash and short-term investments Bonds Equity investments Real estate Financial flexibility: Adequate We regard FM Global's financial flexibility as adequate because it has no debt, but does have adequate sources of capital and liquidity. It doesn't have a credit facility, but maintains material levels of cash and short-term investments and utilizes large highly rated reinsurers in reinsurance program cessions. FEBRUARY 1, 217 6

7 Other Assessments Enterprise risk management: Adequate We regard FM Global's ERM framework as adequate because it can identify, measure, and manage most key risk exposures and losses. The cornerstone of its ERM program is the company's positive risk management culture. FM Global employees are mostly engineers with substantial technical expertise who work as loss-prevention consultants, underwriters, and claims adjusters, supporting a deep-rooted risk-reward culture. FM Global believes all losses are preventable and works diligently with its insureds to help foster best-in-class loss prevention plans. Management and Governance: Satisfactory FM Global's senior management has maintained its strategy of providing extensive competitive property insurance. The company offers best-in-class products and services that keep pace with the needs of its policyholders and owners. The management team has significant depth and breadth as a result of its tendency to make promotions within the company. For example, Thomas Lawson was appointed as president and CEO after chairman Shivan Subramaniam retired at the end of 214. Liquidity: Strong We do not expect FM Global to face any liquidity constraints in meeting its obligations in the next two years because of its strong operating cash flows. Accounting Considerations As an alternative to dividends, FM Global routinely provides a membership credit to policyholders. When afforded, the credit is contingent upon renewal or anniversary of an existing policy and is recorded as a reduction in net premiums earned. FMIC is the flagship insurance company and parent of AFM, FMI, and Appalachian. FMIC, AFM, and Appalachian each file U.S. statutory financial statements. FMIC and FMI, a U.K. subsidiary, generate U.S. and U.K. generally accepted accounting principles statements, respectively. We believe all of FM Global's accounting is consistent with industry standards. Related Criteria And Research Group Rating Methodology, Nov. 19, 213 Insurers: Rating Methodology, May 7, 213 Enterprise Risk Management, May 7, 213 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 212 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 21 Use Of CreditWatch And Outlooks, Sept. 14, 29 Ratings Detail (As Of February 1, 217) Operating Companies Covered By This Report FEBRUARY 1, 217 7

8 Ratings Detail (As Of February 1, 217) (cont.) Factory Mutual Insurance Co. Financial Strength Rating Counterparty Credit Rating Affiliated FM Insurance Co. Financial Strength Rating Issuer Credit Rating F.M. Insurance Co. Ltd. Financial Strength Rating Issuer Credit Rating Domicile Rhode Island *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. FEBRUARY 1, 217 8

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